Getting to Know and Love the Elements of a Finding

July 1, 2013

Here is another of my favorite articles from the past, supplemented with a more current YouTube video:

The elements of a finding are so core to planning, performing, and reporting on an audit, it is going to take me several newsletters to say all that needs to be said. In this newsletter, we will just get a sense of what the elements are. In future newsletters, we will talk about how to use them in planning, fieldwork, and reporting to control the audit process.

Where did these “elements of a finding” come from?

Some smarty pants (and I say that in a complimentary way!) at the GAO (Government Accountability Office) was wise enough to include the elements of a persuasive argument in the Yellow Book (Generally Accepted Government Auditing Standards) and rename them as the elements of a finding. If you are conducting a Yellow Book audit, you are required to include these five elements in your report.

Strangely enough, the AICPA is silent on what should be included in a management letter comment or as I call them, findings. In my opinion, this is one of the major weaknesses in the AICPA’s Statements on Auditing Standards … but they didn’t ask me!

Why bother with the elements of a finding?

The Greeks and the smarty pants at the GAO realized that there are a few key pieces of information that everyone needs to know about an audit issue.

Each of the five elements has a purpose—clears something up for the reader—and should not be left out. If you leave an element out, you leave the reader hanging and pondering unanswered questions.

What questions do the elements answer for the reader?

Condition: What is the problem/issue? What is happening?

Effect: Why should the reader care about this condition? What is the impact?

Cause: Why did the condition happen?

Criteria: How do we, as auditors, know this is a problem? What should be?

Recommendation: How do we solve the condition? The cause?

A few rules about using the elements

Use only one of each. For each finding, choose only one sentence to represent each of the elements. This will keep your finding tight and ensure logical organization. If you add several conditions, effects, or causes, you will confuse and lose the reader and probably yourself, too!

The elements must match. The recommendation matches the condition and cause. In other words, the recommendation must resolve the condition and the cause. To make your argument very clear, use the same terminology in the condition and the cause that you do in the recommendation.

For example, let’s say that you have been auditing the cash disbursement function. You found that the accounting department hasn’t been performing cash reconciliations on a large bank account for the past six months. The clerk who was performing the reconciliations earlier in the year got a new job and no one took over her duties.

Because there are a large number of transactions in the account—about 400 a month—you are concerned that some errors have been made. The account has a maximum balance of $1M. The bank has assessed several bounced check fees totaling $225 so far. Luckily for you, the auditor, the entity has a written policy requiring that cash reconciliations be performed each month.

Notice that the terminology used in the recommendation mirrors or matches the terminology in the condition and cause. Also notice that at this point we are not creating full sentences. Don’t invest time in crafting full sentences until you are happy with the outline. We will work with this finding more next month because I am not finished with it yet!

What is up for next time?

Next time, we will talk about how to use the elements to uncover the root cause. Future newsletters will discuss how to use the elements of a finding in planning, fieldwork, and reporting.

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